logo
logo
Sign in

Successful Business Owners Sell Out

avatar
Joe Clark

Owners who agree to sell their companies may be tired of running the business and seek either a full or partial exit. If an owner wants to liquidate 100% of his or her equity, acquiring investors will usually offer a lower acquisition price. This is partly a result of the greater difficulties that are anticipated in running the business after the transaction if the owner is not available to help with the integration process.

A recapitalization, where the exiting owner retains a minority equity stake in the business (typically 10-40%), is a more common structure. In this case, the exiting owner has incentive to help increase the value of the business (normally through part-time effort). The exiting owner will still benefit from a gradually diminishing role in the operation and the freedom to enjoy more leisurely pursuits. Once the owner is out of the picture, the combined entity will have a go-forward plan in place to continue to grow the business, both internally and through acquisitions. In addition, the exiting majority owner will see the value of his or her equity increase if performance benchmarks are reached. It is important to remember that large companies receive higher valuation multiples from the market compared to smaller companies, partly due to lower enterprise risk.

An exiting owner may also wish to convert his or her equity into cash. This is because many business owners have considerable net worth, but a lot of this value is often value tied up in the business, and thus illiquid. Unlocking this equity through a liquidity event may reduce the seller's risk by diversifying his or her portfolio and allowing the seller to free up more cash.

Another common exit scenario involves an elderly owner who is experiencing material health problems, or an owner who may be getting too old to effectively run the business. Such situations often necessitate the need to quickly find an acquirer. While business development officers of strategic companies can move the M&A process rapidly, large companies often do not respond quickly enough because they are hindered by a number of bureaucratic processes that cause delays (ex. managerial and board approvals). (For related reading, see Owners Can Be Deal Killers In M&A and How The Big Boys Buy.)

Buyer Motivation
In the acquisition marketplace, private equity appears to be better suited to quickly engage the owner, assess the business and complete the acquisition. A reasonably well run mid-market company can be acquired within three to six months if both parties are genuinely invested in the deal. This is especially true if the exiting shareholder's accountants readily provide yearly and monthly financial statements, and if the acquiring equity group already has the accounting and legal due diligence team ready to move in.

Family disputes are also a common driver for an acquisition. A spouse or close relative may be abusing company assets for personal gain, resulting in poor company performance and low morale. Incoming investors can get rid of dysfunctional individuals and restore good management practices in the business, as well as provide peace of mind to the seller.

 For More Telematics Solution Video

collect
0
avatar
Joe Clark
guide
Zupyak is the world’s largest content marketing community, with over 400 000 members and 3 million articles. Explore and get your content discovered.
Read more